A new study coauthored by Penn State and Freddie Mac shows that an overwhelming majority of the time, homebuyers buy more points than they should. A point, or 1% of the cost of the mortgage, lowers your interest rate a specified amount. The cost-benefit analysis simply entails figuring out how many months you'd have to have a the lower interest rate (and lower payment) to make up for the money you spent on the point. Once you buy the points, if you hold the mortgage for less than that breakeven period, you lost money by buying the points. If you hold it longer, your points were positive ROI.
The study showed that only 1.4% of borrowers who bought points ended up holding the mortgage long enough to make the points ROI positive. Of the people who didn't buy points, only 1.5% of people would have been better off purchasing them.
This study shows a couple of things, I think (even assuming the results are skewed by decreasing interest rates that caused a lot of unexpected refinancing). One: people may overestimate how long they're going to keep their mortgages. But a second likely explanation is that people probably don't bother to do the math. For whatever reason, they may just think that lowering your interest rate is worth more than it really is. Important stuff to keep in mind for the next time you look at a home purchase.